Risk Factors
Nippon Chemi-Con positions risk management as the highest priority matter involving corporate leadership. Nippon Chemi-Con has established a Risk Management Committee in accordance with our Basic Policy for Risk Management. This committee is responsible for the centralized management of Group risks. We categorize existing and potential risks as strategic risks, financial risks, hazard risks, operational risks, and climate change related risks. Twice a year, these risks are evaluated by the Risk Management Committee, results of which are reported to the Executive Committee Meetings and the Board of Directors.
Among identified and reported risks, the following are major risks with the potential to impact the financial position, operating results, and cash flow of consolidated companies. Furthermore, forward-looking statements are judgments made by the Nippon Chemi-Con Group at the end of fiscal year 2024(March 31, 2025).
1. Risks concerning economic conditions
Nippon Chemi-Con Group's principle business is manufacturing and sales of capacitors and other electronic components. Our business has expanded globally, covering regions including Japan, Americas, Europe and Asia, and therefore, changes in the economic conditions of these regions and countries, where our products are sold, have the potential to impact the operating results and financial position of Nippon Chemi-Con Group. Regarding the impact of U.S. tariff policies, our approach is to mitigate potential effects as much as possible through measures such as partially reflecting tariff costs in product pricing, optimizing our global production, sales, and logistics systems in response to tariff regulations, and leveraging the strategic advantage of operating a manufacturing facility in the United States to implement targeted sales strategies.
2. Risks concerning exchange rate fluctuations
Products of Nippon Chemi-Con Group are sold not only in Japan but also in Americas, Europe and Asia, and the proportion of consolidated net sales accounted for by overseas sales stood at 79.8% in the FY2023, and 78.6% in the FY2024. Although we forward exchange contracts to hedge the risk of exchange rate fluctuations, it is impossible to eliminate all such risk, and therefore such fluctuations may affect the operating results of Nippon Chemi-Con Group.
In preparing consolidated financial statements, those of our foreign affiliates are converted to JPY. Even if the values remain unchanged in local currencies, yen translations may fluctuate and thereby affect our business results.
3. Risks concerning price competition
Aluminum electrolytic capacitors, our main product, are subject to price competition between competitors in Japan and overseas, which carry the risk of impacting the operating results and financial position of the Group. As our Group conducts business activities in various countries and markets, we must respond to price competition risks based on specific factors of each country and market. Relevant risk factors include fluctuations in production and sales costs, rises in material costs, and innovations in production technology of each country and region. Our Group, which has a high ratio of overseas sales, constantly faces the threat of international competition. As such, intensifying price competition could not only drive down profits, but could also cause a drop in our global market share. One of our strengths is our integrated production system for everything from material development to product sales. We will take advantage of this structure to promote cost reductions by optimizing production systems. At the same time, we will increase our competitive strength by developing products with high added value and high profitability, and by expanding sales in core markets. We take measures against risks in line with the abovementioned business strategies, but intensifying price competition could impact the operating results and financial position of the Group. Looking ahead to fiscal year 2025, the business environment for orders is expected to improve, and the likelihood of excessive price competition remains low.
4. Risks concerning raw material price fluctuations and procurement
Under the circumstances where procurement of materials, in particular, of those in Japan is facing mounting pressure for their price increases mostly from the current soaring logistic costs, personnel expenses and raw material costs, Nippon Chemi-Con Group operating results and financial position may be impacted by cost increases attributable to increased procurement prices for raw materials such as aluminum foils and chemicals or delays in product shipments caused by difficulty in procuring raw materials.
Nippon Chemi-Con Group implements various risk avoidance measures, including promoting continuous cost reductions by engaging in local procurement at overseas manufacturing companies and pursuing productivity improvements. Nippon Chemi-Con Group also purchases raw materials from multiple suppliers and engages in regular credit management of our suppliers. However, Nippon Chemi-Con Group operating results and financial position could be impacted in the event of an extreme increase in raw material prices or extensive raw material shortages caused by natural disasters or other conditions.
Our procurement risk has continued due mainly to the geopolitical tensions caused by armed conflicts, such as the Ukraine conflict, where an armed nation is against another armed nation. The number of our production suspension (EOL) cases has also been on the increase to reduce unprofitable operations. Under the circumstances, we have been working on our supply chain reinforcement that is urged for stable procurement.
5. Risks concerning product defects
Nippon Chemi-Con Group conducts manufacturing at each global production site in accordance with globally recognized quality management standards (UL standards, AEC-Q200, etc.).
However, there is no guarantee that we will not experience product defects in any of our products at some point in the future. Although we do have product liability insurance, there is no guarantee that this insurance will be sufficient to fully cover liability compensation amount.
Furthermore, we have obtained certification such as ISO9001 and IATF16949 at all manufacturing sites as part of efforts to strengthen quality management. However, Nippon Chemi-Con Group operating results and financial position could be impacted by the occurrence of a large-scale product defect.Additionally, the Group has built a system that can promptly deal with a defect, if occurs, to minimize the impact.
6. Risks concerning laws and public regulations
Significant changes in laws and public regulations in regions both at home and overseas, where Nippon Chemi-Con Group operates its business, may influence the business results and financial position of Nippon Chemi-Con Group. Besides expenses to comply with such regulations, criminal penalties and administrative actions including governmental charges or payment of compensation in case of violation against laws and public regulations, may also influence the business results and financial position of Nippon Chemi-Con Group.
In addition, since Nippon Chemi-Con Group's businesses have been subject to environmental laws and regulations, the group would bear the risk of environmental responsibility if such a law or regulation or the like is enforced or if an existing relevant law or regulation undergoes a significant change.
The defendants including NCC have been facing civil class actions that claim damages from electrolytic capacitors, tantalum capacitors, and film capacitors based on the alleged violations of the Economic Competition Law of Israel. NCC admits no such liability. However, after taking various factors and circumstances into consideration, NCC agreed to pay a sum of 3.5 million US dollars to settle the cases to the class action plaintiffs and accordingly concluded a settlement agreement in December 2024. The agreement will take official effect when the court approval proceedings are completed.
When the settlement agreement takes effect, all the civil actions that have claimed damages against the NCC Group from transactions of aluminum electrolytic capacitors, etc. will be settled except one lawsuit case in Taiwan. However, NCC considers that no material loss will incur from this lawsuit.
In addition, SINGAPORE CHEMI-CON (PTE) LTD. (hereafter "SCC"), an NCC subsidiary, has been facing a lawsuit from the sale of components to Dyson Manufacturing Sdn. Bhd. (hereafter "Dyson") who went to law for damages in December 2024 to the Singapore International Commercial Court ("SICC"). Dyson is claiming damages of 145,544,762-pound sterling against SCC. However, SCC regards Dyson's allegation is unreasonable and SCC is determined to assert its legitimate position in court by proving that SCC bears no legal liability against the allegation.
7. Risks concerning natural disasters and unpredictable events
Nippon Chemi-Con Group operating results and financial position could be impacted by a stop in production caused by facility damage or difficulty in supplying electricity or water due to natural disasters such as earthquakes or some unpredictable events. The spread and prolongation of pandemic not only has the potential to cause economic downturn, but may also impact the continuation of business operations due to the suspension of operations requested by national governments. We prioritize the safety and health of our employees and stakeholders, and will continue to gather information and cooperate with administrative authorities. At the same time, we will implement various infection prevention measures to continue operations, including telecommuting and staggered working hours, as well as adopting tools for remote work.
8. Climate change related risks
Climate change related risks stemming from global warming could impact on the performances and financial position of the Nippon Chemi-Con Group. Presently major nations are studying on the introduction of carbon tax, carbon pricing, and an emission trading system. If these are introduced, it would have significant impact on our med-term performance, which stems from risks of additional direct and indirect expenses, including soaring costs of raw materials, to the Group. In addition, if the Nippon Chemi-Con Group fails to fully meet customer requirements related to climate changes (supplier screening standards, etc. concerning environmental performance and sustainability), the failure entails the risk of decreasing in sales due to the lowering competitiveness, etc. of our products in the market. Furthermore, intensifying and more frequent natural disasters entail the risk of suspending the Nippon Chemi-Con Group's business continuity and causing additional extraordinary expenses to the manufacturing activities, etc. in our entire supply chain. To manage such risks, Nippon Chemi-Con Group is working for CO2 reduction initiated by the Energy-Saving Sub-Committee based on the roadmap for Group-wide energy-saving ad carbon-neutral measures. Furthermore, the Nippon Chemi-Con Group has decided to take precedence in expanding disaster prevention equipment in its business bases, that are expected to be significantly affected by natural disasters, and to continue efforts to satisfy customer requirements from the perspectives of procurement and R&D.
9. Occurrence of an event that terminates conversion control
Rights to demand acquisition of common shares for consideration attached to the Class-A shares and the Class-B shares (hereafter collectively referred to as the "Class Shares") are stipulated in NCC's Articles of Incorporation (hereafter referred to as "rights to demand acquisition of common shares"). The investment agreement concluded by and between NCC and Japan Industrial Solutions No. 3 Limited Partnership Agreement for Investment (hereafter referred to as "JIS Fund") has a condition where conversion can be exercised only on and after March 31, 2026. However, when an event takes place that terminates conversion control, JIS Fund may exercise rights to demand acquisition of common shares even before March 31, 2026 (hereafter referred to as "the Investment Agreement").
In addition, NCC's Articles of Incorporation stipulate no limits of transferring Class Shares. Under the Investment Agreement, if JIS Fund desires to transfer Class Shares to third parties before March 31, 2026, JIS Fund is required to obtain NCC's approval; provided, however, that if an event that terminates conversion control took place, JIS Fund may transfer Class Shares to third parties without NCC's approval even before March 31, 2026.
The amount of NCC's consolidated operating income for the year ended March 31, 2025 failed to attain the level of amount specified in the Investment Agreement, which means an event terminating conversion control took place. If JIS Fund exercises rights to demand acquisition of common shares, the common shares held by the existing shareholders could also be diluted.